I’m probably starting to sound like a stuck record on this topic (it all started with this post - which led to this one and then, like a man with really appalling athlete's foot, I just couldn't stop myself scratching this particular itch and had to do another). But I keep hearing people attempting to defend the indefensible when it comes to the kind of remuneration practices which helped to cause the banking crisis.

Earlier this week, for example, we had John Cridland from the CBI on the Today programme on Radio 4 saying that he thought the current controversy over executive remuneration had gone too far and that people were now just taking issue with large pay packets, regardless of whether the recipients had achieved good performance or not. I suspect that the particular case he had in mind was that of Stephen Hester at RBS – the point being that Hester has done what he was asked to do i.e. start reforming a loss-making bank, so he should be paid what he was promised and not vilified for doing a decent job.

I have some sympathy with Hester in that he has been made the fall guy for far worse remuneration practices elsewhere in the banking sector – and I don’t dispute that he has done what he was hired to do, has an extremely difficult job and is entitled to be paid a fair bit more than me. But I’m afraid I can only sympathise up to a point.

Cridland’s point seemed to be that if people have achieved good performance, then they should be rewarded for it. And that principle is fine when the business they work for is profitable (on a long term basis - which is quite an important proviso). But it’s different when – as with RBS - their employer has made a £2 billion loss, is dependent on massive taxpayer support and shareholders have seen nearly all the value wiped off their investment. In cases like that, it seems to me that people are perfectly justified in feeling that it’s outrageous for the highest paid staff at such a business not to be sharing more of the pain with taxpayers and shareholders (according to Robert Peston at the BBC, bankers’ remuneration at RBS has dropped a bit, but nothing like as much as the drop in the bank’s performance).

Cridland had nothing to say about how business was going to restore that broken link between pay and performance (except that we should all just stop going on about it – but if no one talks about it, we will have learnt nothing from the banking crisis). Still, despite all that, if forced to choose between defenders of the indefensible on the Today Programme, I will happily take John Cridland over Dame Angela Knight (of the British Bankers Association) any day of the week....

UPDATE 29.2.2012: Oh dear, a few days later and here I am again on the same subject (clearly, the athlete's foot is playing up again...). But anyway, here goes:

The recent Oscar acceptance speech by Charles Ferguson (director of "Inside Job", a documentary about the financial crisis) lamented the absence of criminal convictions arising out of the financial crisis. This was a useful reminder that it's important not to focus exclusively on executive pay (and to that extent, Cridland has a valid point). Ferguson's comments highlight the importance of holding bankers to account, which was my original starting point in this series of posts about the financial crisis. There was also an interesting piece in The Times recently, which I can't link to as it's behind their pay-wall. In it, Jonathan Fisher QC - who also takes Ferguson's speech as his starting point - argues that if we're really serious about reducing the risk of this happening again a similar scale, we need the threat of prison sentences for financial executives who take irresponsible decisions. In particular, he highlights the admission by the former head of investment banking at RBS that he didn't fully understand how CDOs worked (although he was well aware that the bank's exposure to them was rising rapidly) - and the fact that the UK Financial Services Authority seems to have felt powerless to do anything about that.

What he advocates is a criminal offence which would allow prosecution of executives where - although they may not have deliberately set out to cause damage - they have been reckless e.g. by effectively turning a blind eye to the risks they were running with other people's money. Let's hope Parliament takes note (because the government hasn't). No doubt voices will be raised against it saying that offences like this will be difficult to prosecute in practice and that it will have chilling effect on financial innovation. There may be some substance to both objections - but at the moment there is no effective sanction against individuals and as we've seen, financial innovation for its own sake can have disastrous consequences (so making people think not just twice but three or four times about whether a whizzy new product was actually a sensible thing to be getting involved with would be no bad thing).

About Me

Paul Samael

Welcome to my blog, "Publishing Waste" which will either (a) chronicle my heroic efforts to self-publish my own fiction; or (b) demonstrate beyond a scintilla of doubt the utter futility of (a). And along the way, I will also be doing some reviews of other people's books and occasionally blogging about other stuff.